Is Alibaba's major selloff over? I discuss superinvestor buying trends, risks with BABA's VIE ADR structure and regulatory changes, and some of BABA's financial updates. Add me on Instagram: michellemarki
It's late August 2021, and you may be wondering if we're out of the woods with Alibaba seemingly hitting rock bottom at around $153 a share, off its high of $317 a share in October 2020, or a -51.7% change. We should consider various factors when evaluating whether a stock is an investment opportunity or not so I hope you enjoy my video!
Time Stamps:
0:00 - Alibaba stock hits low
2:41 - Superinvestors buying BABA
5:19 - Explaining ADR and VIE risks
9:17 - Delisting and regulatory risks
11:30 - Is the business moat breached?
14:06 - Alibaba's $2.8B fine & financial updates
16:25 - CEO's Shareholder Letter
Based on a stochastic technical indicator, it seems that BABA was pretty oversold so even though it might be on a new uptrend for now, but that doesn't necessarily instill any reassurance of where things could go from here and I borrow from a Warren Buffett 1987 poker analogy.
Buffett doesn't seem to have joined the superinvestor buying spree of BABA over the last couple of quarters in 2021. Charlie Munger, Mohnish Pabrai, Guy Spier, Bill Miller, Thomas Russo, and many more superinvestors have bought BABA as of Q2 2021. I discuss what some of their percentage allocations could potentially mean.
You may be wondering, what's so tricky about Alibaba's VIE ADR structure? ADR means American Depository Receipt. Variable Interest Entity (VIE) is basically an offshore shell company that Alibaba has to have in order to list as an ADR in an American exchange so foreign investors would be allowed to buy its stock. But foreign investors are really just buying shares in the shell company as an indirect way of staking claim to Alibaba's underlying business profits and assets in mainland China.
As with anything though, we should do our due diligence and check out any and all of the risks that could be related to the VIE corporate structure.
Of course, what's been hammering the stock prices of many Chinese companies lately has been the concern with regard to changing regulations. This could be coming from both China clamping on offshore listings and the same thing with US regulators.
In classic brinkmanship, regulatory rumblings have been escalating over the years that in 2020, Alibaba CFO Maggie Wu assured investors that Alibaba would not get delisted.
We should consider if anything has changed in the fundamental core of the business that has maimed its durable competitive advantage, AKA moat, and put it at a disadvantage of its future earnings and cash flows? We all need to form our own conclusions.
For example, we should ask, what does it mean when China has passed one of the world's strictest data privacy laws? Maybe it's comparable to the EU's GDPR rules, but who knwos. But we need to seriously consider whether these rules significantly change how these Chinese big tech companies make money.
To touch on a few financial points that stood out to me, as many people know earlier in 2021 Alibaba was hit with a $2.8 billion anti-trust/anti-monopoly fine. Alibaba seems to have accepted the penalty with sincerity and wants its industry to comply with normative expectations that Chinese regulators have for Chinese big tech.
Despite being slapped with the $2.8B fine, Alibaba still generated income of $13.7B in the fiscal year ending March 31, 2021. They seem to be confident about their long term growth prospects because they increased their share buybacks from $10B to $15B (maybe it's a good time to do so!). On the not-so-fun-side, they've been enjoying lower tax rates of around 17.7% but in FY2022 this may be increasing to between 23%-25%.
In addition to evaluating a company's quantitative performance, we should also look at qualitative factors like candor, honesty, and transparency in CEO Daniel Zhang's Shareholder Letter. A useful guide for this is Laura Rittenhouse's "Investing Between The Lines" book.
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Disclaimers: This content is for entertainment, information, education purposes only. Michelle is not a financial advisor and is not providing financial, investment, trading, tax advice, or recommendations. Please consult with a professional financial advisor with a fiduciary duty and responsibility if you need help in your situation. All trademarks, logos, and brand names belong to their respective owners.
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